Old Wounds and New Oil

It was all about peace on earth and goodwill to all men last week. Today it’s about oil, nationalism and long-term beefs.

The Self Defense Force of Japan was forced recently to scramble an F-15 in response to China flying a cargo plane over disputed islands at the center of a brewing conflict. Thus far the saber rattling has been confined to economic boycotts and some physical violence aimed at Japanese workers living in China. But this thing is heating up to the point where neither side will be able to back down and save face at the same time. Moreover, neither side wants to give up what could be a mother lode of fossil fuel.

Recently it was discovered there could be a lot of oil in the region and these islands (called Senkaku in Japan and Diaoyu in China) are just one area of dispute.

While Americans are being sold a pipedream instead of actually building pipelines the rest of the world continues to scramble for fossil fuels. I always say those countries that control vast amounts of food and fuel will be dominant players in the global economy for the next thirty years - and I’m not talking solar panels or windmills. China knows this and I suspect even our current administration understands this despite the fairy tales and wasted taxpayer dollars on projects that are too early or too useless.

In the meantime, what’s brewing in Asia could make the Middle East conflict look like kids in a sandbox.

According to US estimates there are 28 billion barrels of oil in the South China Sea. According to Chinese estimates there are 213 billion barrels of oil in the South China Sea. Some experts think both estimates are woefully low. So while America lurches toward a trade war centered over slowing the importation of glass panels, China has developed global deals in all corners of the planet to suck up as much oil and natural gas as possible but probably needs more to displace America as the most powerful nation in the world.

The dispute with Japan is just one of many. Things have gotten so problematic recently that a high ranking politician in the Philippines said his nation approved of Japan ditching its pacifist constitution and rearming itself. For those that may not know or remember, Japan committed some of the worst war crimes in history against the people (especially women) of the Philippines and other nations in the Pacific during WWII. Yet today the concern is over an “imperial China.”

China Wants These Islands and More:

• Spartly from Vietnam• Paracel from Vietnam• Huangyan from Philippines• Diaoyu from Japan

Honest Abe

The Japanese people forever renounce war as a sovereign right of their nation and the threat or use of force as means of settling international disputes. - Article 9

The Japanese Constitution was amended on May 3, 1947 to prohibit acts of war by the state. Accordingly, the nation cannot maintain an army, navy or air force. Of course, the nation does have weapons and ships under its extended police force but nothing like the kind of military characteristic of the nation throughout time. That is probably going to change in a hurry. A couple of weeks ago Shinzo Abe was elected back into office in one of the biggest landslide elections in Japanese history.

When Abe won back in 2006 he promised a “more confident country brimming with attractiveness and vigor” and to ditch article 9. This time he has promised the same and more. He has already visited the Yasukuni Shrine which the international community, led by China, denounces as a shrine for WWII war criminals. Abe has also promised to manhandle the Bank of Japan, forcing them to print more money in an effort to pull the nation out of a two-decade long struggle that has seen prices drift to the same or even lower levels.

Yes, Ben Bernanke eat your heart out, this guy says put the pedal to the metal and let’s inflate our way out of this hole.

Ironically, this morning I would rather focus on the saber rattling. You see, Japan is in a crisis that historically has brought about nationalism and war. Debt to GDP is over 200% and half the young men are considered “grass-eaters” who would rather go to the beauty salon than the gym, have no interest in working long hours and are not even that much into girls. The country is in its fifth recession in the past 15 years. Talk about living off the past. Nobody talks about Japan ruling the world economically or otherwise.

That is, nobody talked about it until Abe won 325 of 480 seats in the lower house of the Diet.

Sequester and Military Spending

How often have you heard someone, especially some liberal comic, remark America doesn’t need all those military bases all over the world. It actually sounds logical but for a few key points. First, in an all-volunteer military the allure of being stationed overseas is a great recruiting tool. I had a blast in North Dakota but believe it or not it wasn’t on my wish list of places to be stationed. But there is an even more pressing issue. If we close bases in and around Japan and Germany both nations will have cause to ditch their pacifist Constitutions or those parts forced upon them in defeat.

Right now there doesn’t appear to be a threat from Germany, which hasn’t made a lot of noise about its article 24 but make no mistake there would be a movement for greater self-reliance and military might should America pull out. War economies generally have an amazing ability to jump-start stalled gears of commerce. After a series of mistakes America finally pulled out of the Great Depression after being pulled into WWII. This must look attractive to Japan and could get it brimming with confidence once more. It might even get some of those grass-eaters to stop playing with their smart phones and pick up some weights.

President Obama left his Hawaiian vacation early to deal with our fiscal cliff drama. If nothing is done we’ll begin massive cuts to military spending along with crushing tax hikes. For those that think the former is no big deal - think again. A set of dominos could be ready to go off that could see a fresh arms race with deep-pocketed nations. The Japanese promised to never get belligerent again by starting a war or armed conflict, but Shinzo Abe was elected on a platform of pure belligerency.

I guess one could say the same for President Obama whose war on success moves into another level over the next four years. But, just how far is the administration willing to implement a socialist agenda in an era of greater global competition in economics that’s not too far off militarily as well? The conservative party in Japan is making no bones about it - they have a game plan and determination to bring a 20 year slide to a halt. Conservatives in the US House of Representatives are also making no bones about it - they have drawn a line against higher taxes.

The showdown in America, like the turmoil in the Middle East, may one day pale in comparison to the war in Asia.

I know, I know it’s a long ways off and may never happen. Just like we have room to build even higher piles of debt, slow economic growth and live with subpar educational standards. We have all the time in the world, except with it comes to stopping the cooling of the planet. I get that as the general message from the White House. The thing is the world is moving faster than we think and we could be closer to a point of no return sooner rather than later.

There are more consequences than advertised by massively cutting our defense budget and capabilities. The media isn’t talking about it which makes it even more dangerous.

Peace on earth and goodwill toward men… that was yesterday, today it’s about old wounds and new oil.

Charles V. Payne is a regular contributor to the Fox Business and Fox News Networks.
He is also the Chief Executive Officer and Principle Analyst of Wall Street Strategies, Inc. (WSSI), founded in 1991 which provides subscription analytical services to both individual and institutional investors.